Surprisingly, this isn’t a big headline today, but certainly big news. Fannie Mae and Freddie Mac are seeing huge drops today: [Thanks John for catching this one!]
NEW YORK (CNNMoney.com) — Shares of mortgage financing giants Fannie Mae and Freddie Mac both plunged Monday as fears deepened about the credit crisis and housing meltdown.
In midday trading, shares of Fannie Mae (FNM, Fortune 500) were down 20% and Freddie Mac (FRE, Fortune 500) shares were down more than 22%.
Fannie Mae and Freddie Mac are government sponsored enterprises that help the mortgage market function by purchasing pools of loans and packaging them into securities.
With more than a million Americans facing foreclosure and home prices sinking, the two companies have been hit hard.
The companies bought securities backed by risky subprime mortgages when the housing market was booming, but as the housing market has buckled under credit crisis pressures, concerns have grown about their need for more capital. Some analysts have even suggested that a government bailout of the two may be necessary.
Both stocks are off their session lows currently, but still down big on the day. To give you an idea of how these stocks have been faring recently, here’s the five-year FNM chart from Yahoo:
Problems with FNM and FRE could have serious implications for the broader housing market:
The collapse of the housing bubble has left them [FNM and FRE] the dominant players in housing finance. Together, they bought the equivalent of 68 percent of the single-family mortgages that originated during the first three months of this year, according to the Office of Federal Housing Enterprise Oversight.
After years of hand-wringing about the risks that Fannie Mae and Freddie Mac’s rapid growth might pose to the financial system, the government has loosened restraints on the companies in the stated hope that they will help prop up the housing market.
It was a strange hope. Toxic portfolios have damaged old and venerable institutions- it was unlikely that the GSEs would be immune to the same poison.
Our admin and I were discussing the following question a couple of days ago:
What is likely to give the higher ROI- a share of FNM or a lottery ticket?
Any opinions?
A share of FNM can be taken as a capital loss. Of course, its value to purchase is considerably more than a lottery ticket.
Potential payback aside, I’d still probably rather buy 16 lottery tickets than one share of FNM
Old Doom friend WireGuy has a serious and detailed analysis of today’s GSE news that’s a must-read for Doomers wanting to go deeper into this important story.
“Fannie, Freddie Socked by Investor Paranoia”, by Paul Jackson, Housing Wire, July 7, 2008.
Tanta at Calculated Risk would normally have been expected to engage heartily in this story, bringing her unique servicer’s viewpoint. I hope her health allows her to add her weight to Paul’s soon. Certainly she’ll see the issue as important, and no doubt she’ll have a few choice words for the Lehman analyst
FREDDIE RUNS AMOK, Part 1 of 2 — NIGHTMARE ON WALL STREET
(OK, Wednesday was way hairier than Monday, even. I’ve got to try making fun of this. “Disaster,” says Igor, but I say “Horror!”)
FREDDIE RUNS AMOK, Part 2 of 2 — THIS TIME CO-STARRING FANNIE
“I’ve got mortgages on homes, I’ve got stiffness in my bones …
Twist,
Do you see the fall of Freddie and Fannie turning into a very significant credit crunch (high down payments of 20% or more and greater
documentation of income)???
I would be very interested in your take on the situation.
Thanks
Surak-
That’s the big question, isn’t it?
I believe that in the absence of Fannie and Freddie, the mortgage market would have had no choice but to raise rates tremendously to properly price in the risk, and prices would have had to crash to compensate for the horrific interest rates. That would be the only way to make purchasing mortgages appealing to investors.
So what does that mean for us now? Unless Congress wants to bankroll a bunch of bad loans at below market rates, it seems like we could be shifting toward that scenario.
Long term however, I think credit is going to have to loosen a lot. HBs built under the assumption that everyone with a pulse should have a house. If we have a world where only the most credit worthy own houses- what can be done with the difference?
My dad told me that when he moved to AZ in the early sixties, there had been a huge RE bust in Phoenix. You could drive around Scottsdale and there were large pink stickers on the doors of foreclosures. Pick a house, pick a payment, and the house was yours.
The government is the wild card. Do they let the free market work- which brings about tightening in the short term, and loosening in the long term, or do they try and prop up the GSEs?
I don’t believe that propping up the GSEs by nationalization or other means will prop up the market. Supply/demand will continue to put downward pressure on the market and defaults will continue- at great expense to the taxpayer.
The hearings today should be informative- we’ll see if the government really believes that are capable of implementing a “hurricane prevention program”.